Saturday, February 22, 2014

Outstanding student debt again topped $1 trillion in the fourth quarter of 2013, making it the second-largest pool of debt in the nation behind mortgages. This has tripled in just a decade, as higher-education prices increased faster than medical costs, up 500 percent since 1985. While delinquency rates for all loans have trended downward for the past three years, student loan delinquencies have surged; currently 11.5 percent of all student loans are 90 days behind or more.

The recent explosion in student debt—now held by one in five U.S. households—coincided with the Great Recession’s awful job market. Millennials have come of age amid stagnant wages, high unemployment, a lack of quality jobs (44 percent of recent graduates work in positions that don’t require a college degree), and, for those fortunate enough to attend college, an average of nearly $30,000 in debt...

First-time homebuyers accounted for just over one-quarter of all sales over the past year, far lower than the historic average. That percentage was even lower for households under age 40. All-cash home purchases, by contrast, hit 42 percent of sales last November, according to RealtyTrac. Recent college graduates typically don’t have that kind of money lying around.

While weak wages and high unemployment for young people explains much of the problem, an analysis from the New York Fed offers compelling evidence for the role of student debt. In 2012, 30-year-olds were more likely to have a mortgage if they had no student debt than if they did. The same trend held for vehicle purchases. In one way, this makes no sense—college graduates have much higher average wages than their counterparts, and should have a higher percentage of auto and home purchases. But student debt is holding them back. Indeed, you can say that student debt is crowding out other forms of credit. For example, high student loan delinquencies damage credit scores, often putting access to credit out of reach. Just having a student loan increases overall debt, making it hard to qualify for other loans, especially under new mortgage rules that limit total debt for a would-be borrower to 43 percent of their annual income.

This isn’t just about the housing market; it’s about the entire economy. A struggling student debt holder who can’t afford a mortgage—or find a job—may also have trouble affording rent or passing a credit check from a landlord. They may have to find roommates to bunk with, or move back in with their parents. This leads to a reduction in household formation, one of our most unsung economic indicators.

All of that is certainly true, but I must add that outrageous housing costs are certainly part of the equation.

I graduated UCLA on full-ride scholarship and thus have no student loan debt. But at 33 years old, I'm looking at renting for the forseeable future despite a healthy middle class income stream. Housing is simply preposterously unaffordable where my wife and I work and live--and we're not even in a big city. My 32-year-old brother who makes fairly decent money but lives in a big city, is renting a studio apartment. I know a lot of other young people with decent jobs who still live with relatives, are holed up in small apartments, or made the mistake of becoming house-poor just by buying a condo, and are being shredded by HOA fees.

There is very little housing inventory, partly because banks are artificially restricting inventory by keeping vacant properties, and partly because there's simply so little turnover as homeowners age in their homes, cannot afford to sell, and eventually their adult children inherit and either keep the property or sell to investors. Note that figure about all-cash home purchases being 42% of all home purchases. That number means that most people under 40 are effectively completely squeezed out of the housing market where the jobs are.

If I had less pride, I'd be living in my parents' basement, too. Instead, I try to run a small business and be a "producer" in the lovely parlance of Objectivists while renting. But with no rent control, however, that too is an unsustainable proposition over the long term. So I'm a tasty little morsel for some big property management company that sees no problem raising rents beyond the rate of inflation even as wages continue to fall below it. But rents aren't rising as fast as buying costs, so what are you doing to do?

Someone might want to do something about all of that. But it doesn't look like either party cares. If anyone on either side of the aisle talks about housing at all, it only seems to be about raising prices so that the asset class will be more comfortable. Meanwhile, most of the progressive conversation (Elizabeth Warren excepted) seems to be all about either defending Medicare and Social Security or raising the minimum wage, neither of which are immediately relevant issues for 25-40 year olds with crappy, unstable low-mid five-figure jobs trying to figure out how to pay the rent and if they'll ever be able to afford to have children.

Medicare, Social Security and minimum wages are incredibly important, of course. But if there's a reason Millennials seem to be veering away from the Democratic Party and becoming more apathetic, maybe it's because neither side seems to give a damn about us. Even Obamacare, for all its benefits, has the side effect of making younger adults at low risk for health problems pay more into an insurance scheme to reduce costs for mostly older Americans. The Republican Party despises us, and the Democratic Party seems to think it's enough that just opposing blatant Republican bigotry and the most outrageous economic exploitation will be enough to rally us around the flag.

Somehow I don't think it's going to work. Nor should it. Supporting the Democratic Party is still the only viable option because the other side is depraved. But frankly, at this point neither political party actually deserves our votes.